Drawbacks of buying notes of out state

18 Replies

Hi BP,

I am curious, what are the drawbacks of purchasing notes from out of state and the tax implications? 

There are a few states/localities where you have to register as an out of state company, or get licenses. A lot of the drawbacks are pretty common sense, like you won't have a team on the ground right away and will need to build one. With that said, it's easier than owning real estate out of state since once you get it reperforming it's the owner's job to take care of the house.

Bryan,

I would say that notes are similar to purchasing real estate out of state without the property management overhead. As you know you are assuming the position of the lender when purchasing notes.  There are number of ways that a note investor could get involved (performing, non-performing).  If you are interested in cash flow, you may be interested in purchasing a partial (part of the payment stream from the note).  There are not drawbacks per say.  There is certainly due diligence that needs to be done but it is not any worse out of state.  You still need to evaluate property value, borrower etc.

@Bryan Pham

There are drawbacks and many positives. As another person mentioned, there are state licensing issues etc. that you have to deal with.

The question I ask other investor is, if you buy locally how often do you go by that property ? Many never do or once a year. When I hear that then I ask what is the difference then with buying out of state. Unless your in the industry and have close contacts who are tradespeople who could work on a house if you took it back as REO it really does not matter. I have agents, contractors, servicer and legal teams all in place and I manage them and have others put eyes on the assets and have boots on the ground.

If you manage it properly it does not make a difference where you invest

@Bryan Pham , What are your chances of success if you are running the note business alone? Are you part of a larger group who share ideas/vendor information/Realtor contacts/rehabber contacts? With a large team of people to answer any questions that you may have will potentially lower your risk in this business. Lot of people on this forum are part of Scott Carson's mastermind group and share a lot of information. 

To answer your second question on purchasing notes out of state, i dont see an issue on that. I buy out of state notes mostly. Have only 1 CA note. The condo that i first bought here in CA, had a parking space selling for $20,000. !! The note that i bought during my first year in the note business was for ~$16,000 with an amazing return.

@Patrick Desjardins:

 You make an interesting point with the importance of having a local team. Besides, making sure a vacant property doesn't become a meth house (lol). What other reasons why having a team on the ground is important when it comes to a performing note? To answer my own question, I can only think of keeping an eye on the property to see if it looks like it's going into non-performing again (based on house appearance?). 

Originally posted by @Marcus Lawson :

@Patrick Desjardins:

 You make an interesting point with the importance of having a local team. Besides, making sure a vacant property doesn't become a meth house (lol). What other reasons why having a team on the ground is important when it comes to a performing note? To answer my own question, I can only think of keeping an eye on the property to see if it looks like it's going into non-performing again (based on house appearance?). 

 No, if the note is performing then you're golden. But for NPNs, there are two phases where they are incredibly helpful:

1) During due diligence, having a reliable real estate agent in the area is very helpful so he can give you values. Having an attorney in that state is also good in case you have questions about a specific note/collateral.

2) When you have to foreclose, which happens a lot with NPNs, then you'll very often end up with the house if no one bids on it at foreclosure auction. In that case, as with any real estate, having an agent/contractors/closing company/attorney/property management company can be very useful. That's a lot of people, which is why experienced note investors recommend starting out with a handful of states. 

You can't be so specific that you'll only buy in certain zip codes for example, or you'll barely ever find notes. But you have to focus on specific markets where there is inventory and you can develop relationships. I would buy a slightly worse deal in the market where I have a network figured out, over a better deal where I have no one and have to restart from scratch.

Just my 2 cents.

All of the above posts are very good and hit a lot of important points about local vs. out of state note investing.

However, the number one and two points I have found are (1) My knowledge of property values is much less for properties outside of Texas and (2) my knowledge of the laws regarding mortgages, trust deeds, foreclosure, title, etc. is much less.  Add to this extreme differences in title insurance as well as customs, and my biggest hurdle when moving my operation nationwide is the learning curve for each different state and sometimes locality.  

Thats a good point @Chris Seveney , I attended a seminar on notes investing in my local REIA and the speaker mentioned something about the dangers of inviting on out of state notes because of tax implications. Could you help me understand how this works when you buy a note property from out of state?

@Patrick Desjardins , do you set up separate LLC, specifically for different states depending on where the notes are for protection?

Thank you for the tip @Ray Trounday , I read those several notes investment guides but I can't seem to guide a accurate guideline of the list of items I would need to complete my due diligence, could you help me understand the steps you took for your due diligence?  

Hi @Pari Thiagasundaram , you bring up many valid points. Does Scott Carson run his mastermind in the Fremont area and do you know if I could find his meet up on meet up.com?

Wow that's amazing returns, I would love to pick your mind over coffee if you are free on weekends. 

@Don Konipol , Very true. I was planning on limiting myself to key areas and not spreading myself too thin. Thank you for your feedback! 

Tax Implications ??? can you be more specific.. some states have a business privilege tax which is nominal.. and some have income tax but that offsets your CA income tax.

and some states you need to register your LLC that's a few hundred..

other than that I am thinking its the state and federal tax code.

Originally posted by @Pari Thiagasundaram :

@Bryan Pham , What are your chances of success if you are running the note business alone? Are you part of a larger group who share ideas/vendor information/Realtor contacts/rehabber contacts? With a large team of people to answer any questions that you may have will potentially lower your risk in this business. Lot of people on this forum are part of Scott Carson's mastermind group and share a lot of information. 

To answer your second question on purchasing notes out of state, i dont see an issue on that. I buy out of state notes mostly. Have only 1 CA note. The condo that i first bought here in CA, had a parking space selling for $20,000. !! The note that i bought during my first year in the note business was for ~$16,000 with an amazing return.

did the note you were foreclosing in Ohio get sold at the steps or did you take the property back ???

@Jay Hinrichs , we got the property back and once we get the title in 60-90 days, will be marketing it. We have just listed our St Louis, MO property on MLS. Property looks awesome after the cleanup :)

@Bryan Pham , would love to meet during weekends ! 

@Pari Thiagasundaram   why 60 to 90 days.. that seems an awful long time to have the sherrif or trustee record your deed.

I know in GA it can take 60 days.. I have not found that the case in OHIO though.. just curious really.

but good luck with them..   PS how long did it take to foreclose in OHIO ( uncontested action)? 

@Jay Hinrichs , 60-90 days is what my attorney told me. It took about a year as we had to fix the missing assignments. 

The borrower stayed in the property for about ~ 3 years without paying a dime!. After getting the judgement, we even offered $1000 for the borrower to move out. She didnt take that money!. It took 2+ weeks for us to get the Sheriff there and get her out.

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